Brock University Econ 1P92 Fall 2024 Macroeconomics Lecture Notes PDF

Econ 1P92 Brock University Fall 2024 Principles of Macroeconomics Ninth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Ninth Canadian Edition by Marc Prud’Homme U...

Econ 1P92 Brock University Fall 2024 Principles of Macroeconomics Ninth Canadian Edition by Mankiw/Kneebone/McKenzie Adapted for the Ninth Canadian Edition by Marc Prud’Homme University of Ottawa Copyright © 2024 Cengage Learning Ltd. 1-1 TEN PRINCIPLES OF ECONOMICS Chapter 1 Copyright © 2024 Cengage Learning Ltd. 1-2  TEN PRINCIPLES OF ECONOMICS The word economy comes from the Greek word for “one who manages a household.” 1-1 Copyright © 2024 Cengage Learning Ltd. 1-3 TEN PRINCIPLES OF ECONOMICS  The management of society’s resources is important because resources are scarce.  SCARCITY: resources are limited and therefore society cannot produce all the goods and services people wish to have.  ECONOMICS: the study of how society manages its scarce resources.  In most societies, resources are allocated by the combined actions of millions of households and firms. 1-1 Copyright © 2024 Cengage Learning Ltd. 1-4 TEN PRINCIPLES OF ECONOMICS  Economists study how people make decisions:  How much they work  What they buy  How much they save  How they invest their savings  Economists study how people interact:  How buyers and sellers together determine the price at which a good is sold and the quantity that is sold 1-1 Copyright © 2024 Cengage Learning Ltd. 1-5 TEN PRINCIPLES OF ECONOMICS  Economists analyze forces and trends that affect:  The economy  The growth in average income  The fraction of the population that cannot find work  The rate at which prices are rising 1-1 Copyright © 2024 Cengage Learning Ltd. 1-6  HOW PEOPLE MAKE DECISIONS Principle 1: People Face Tradeoffs “There ain’t no such thing as a free lunch.”  EFFICIENCY: the property of society getting the most it can from its scarce resources  EQUITY: the property of distributing economic prosperity fairly among the members of society 1- Copyright © 2024 Cengage Learning Ltd. 1-7 1a  HOW PEOPLE MAKE DECISIONS Principle 2: The Cost of Something Is What You Give Up to Get It  OPPORTUNITY COST: whatever must be given up to obtain some item 1- Copyright © 2024 Cengage Learning Ltd. 1-8 1b  HOW PEOPLE MAKE DECISIONS Principle 3: Rational People Think at the Margin  RATIONAL PEOPLE: those who systematically and purposefully do the best they can to achieve their objectives  MARGINAL CHANGES: small incremental adjustments to a 1- plan of actionCopyright © 2024 Cengage Learning Ltd. 1-9 1c  HOW PEOPLE MAKE DECISIONS Principle 4: People Respond to Incentives  INCENTIVE: something that induces a person to act 1- Copyright © 2024 Cengage Learning Ltd. 1-10 1d  Active Learning Discussion Questions You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired or sell the car “as is.” In each of the following scenarios, should you have the transmission repaired? Explain. A. Blue Book value is $6500 if the transmission works and $5700 if it doesn’t work. B. Blue Book value is $6000 if the transmission works 1-1 and Copyright © 2024 Cengage Learning Ltd. 1-11  Active Learning Answers Cost of fixing transmission = $600 A. Blue Book value is $6500 if the transmission works, $5700 if it doesn’t work. Benefit of fixing the transmission = $800 ($6500 – $5700). It’s worthwhile to have the transmission fixed. B. Blue Book value is $6000 if the transmission works, $5500 if it doesn’t work. Benefit of fixing the transmission is only $500. Paying $600 to fix the transmission is not worthwhile. 1-1 Copyright © 2024 Cengage Learning Ltd. 1-12  Active Learning Answers (cont’d) Observations:  The $1000 you previously spent on repairs is irrelevant.  What matters is the cost and benefit of the marginal repair (i.e., the transmission).  The change in incentives from scenario A to scenario B caused your decision to change. 1-1 Copyright © 2024 Cengage Learning Ltd. 1-13  Quick Quiz 2. Your opportunity cost of 3. A marginal change is one going to a movie is that a. the price of the ticket a. is not important for public policy. b. the price of the ticket plus the cost of any soda and b. incrementally alters an popcorn you buy at the theatre existing plan. c. the total cash expenditure c. makes an outcome needed to go to the movie plus inefficient. the value of your time d. does not influence d. zero, as long as you enjoy incentives. the movie and consider it a worthwhile use of time and money 1-1 Copyright © 2024 Cengage Learning Ltd. 1-14  HOW PEOPLE INTERACT Principle 5: Trade Can Make Everyone Better  Trade allows Off countries to specialize in what they do best and to enjoy a greater variety of goods and services.  Trade between two countries can make each country better off. 1- Copyright © 2024 Cengage Learning Ltd. 1-15 2a  HOW PEOPLE INTERACT Principle 6: Markets Are Usually a Good Way to Organize Economic Activity  MARKET ECONOMY: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services 1- Copyright © 2024 Cengage Learning Ltd. 1-16 2b  HOW PEOPLE INTERACT Principle 6: Markets Are Usually a Good Way to Organize Economic Activity (cont’d)  In his 1776 book, Adam Smith observed that households and firms interacting in markets act as if they are guided by an invisible hand that leads them to desirable market outcomes. 1- Copyright © 2024 Cengage Learning Ltd. 1-17 2b  HOW PEOPLE INTERACT Principle 7: Governments Can Sometimes Improve Market Outcomes  We need governments for two reasons: 1. To enforce property rights  PROPERTY RIGHTS: the ability of an individual to own and exercise control over scarce resources 2. To intervene in the economy.  Promote efficiency: Market failure  Promote equity 1- Copyright © 2024 Cengage Learning Ltd. 1-18 2c  HOW PEOPLE INTERACT Principle 7: Governments Can Sometimes Improve Market Outcomes (cont’d)  MARKET FAILURE: a situation in which a market left on its own fails to allocate resources efficiently  EXTERNALITY: the impact of one person’s actions on the well- being of a bystander  MARKET POWER: the ability of a single economic actor (or a small group of actors) to have a substantial influence on market prices  Even when the outcomes are efficient, there can still be 1- 2c disparities in economic well-being. Copyright © 2024 Cengage Learning Ltd. 1-19  Quick Quiz 5. International trade 7. Governments may benefits a nation when intervene in a market economy in order to a. its revenue from selling abroad exceeds its outlays from a. protect the property rights of buying abroad. high-income people. b. its trading partners b. create government jobs. experience reduced economic well-being. c. ensure that everyone receives the same income. c. all nations are specializing in producing what they do best. d. correct market failures and achieve a more equitable d. no domestic jobs are lost distribution of income. because of trade. 1-2 Copyright © 2024 Cengage Learning Ltd. 1-20  Active Learning Discussion Questions For each of the following situations, what is the government’s role? Does the government’s intervention improve the outcome? 1. Public schools for K–12 2. Workplace safety regulations 3. Public highways 4. Patent laws, which allow drug companies to charge high prices for life-saving drugs 1-2 Copyright © 2024 Cengage Learning Ltd. 1-21  HOW THE ECONOMY AS A WHOLE WORKS Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services  PRODUCTIVITY: the quantity of goods and services produced from each hour of a worker’s time 1- Copyright © 2024 Cengage Learning Ltd. 1-22 3a  HOW THE ECONOMY AS A WHOLE WORKS Principle 9: Prices Rise When the Government Prints Too Much Money  INFLATION: an increase in the overall level of prices in the economy  What causes inflation? 1- Copyright © 2024 Cengage Learning Ltd. 1-23 3b  HOW THE ECONOMY AS A WHOLE WORKS Principle 10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment  This short-run tradeoff plays a key role in the analysis of the business cycle.  BUSINESS CYCLE: the irregular and largely unpredictable fluctuations in economic activity, 1- as measured by the production of goods and Copyright © 2024 Cengage Learning Ltd. 1-24 3c  Quick Quiz 8. The main reason that 10. If a central bank uses some nations have higher the tools of monetary policy average living standards to reduce the demand for than others is that goods and services, the likely result is _________ a. the richer nations have inflation and _________ exploited the poorer ones. unemployment in the short b. the central banks of some run. nations have created more a. lower; lower money. b. lower; higher c. some nations have stronger laws protecting worker rights. c. higher; higher d. some nations have higher d. higher; lower levels of productivity. 1-3 Copyright © 2024 Cengage Learning Ltd. 1-25 TABLE 1.1 Ten Principles of Economics 1-4 Copyright © 2024 Cengage Learning Ltd. 1-26 THE END Copyright © 2024 Cengage Learning Ltd. 1-27